11/10/2011

Compared to this, Greece was just a sideshow. Italy could blow Europe to pieces

Watching the cost of servicing Italy’s debt surge past the level that triggered bailouts in Greece, Ireland and Portugal, I found one of Kipling’s verses forming in my mind:

This is midnight — let no star
Delude us — dawn is very far.
This is the tempest long foretold —
Slow to make head but sure to hold.

Italy is the third-largest economy in the EU, and the eighth largest on the planet. Its outstanding debt of €1.9 trillion (£1.6 trillion) accounts for 25 per cent of all the debt in the eurozone.

Too big to fail? Italy is the third-largest economy in Europe

The Greek crisis was never a serious threat to Europe. Greece accounts for less than two per cent of the EU’s economy. A default by Athens could be managed as a controlled explosion. A default by Rome, on the other hand, would blow the European economy to smithereens.

The calamity now overtaking Italy was ordained when the euro was launched. In order to qualify, governments were supposed to have brought their total debts below 60 per cent of GDP; Italy’s was 114 per cent.

Several economists pointed out at the time that admitting the Italians would be like inviting an elephant into a coracle but, as usual in the EU, political dreams trumped economic reality.

For several years, markets pretended that all debts in the eurozone were equally safe — that Italian and German debt, for example, were interchangeable. Eventually, though, the realisation sank in: the Italian economy was not growing, which meant its debt, in relation to its GDP, was as high as ever.

The loans that had been pressed on the Italian treasury over decades suddenly looked vulnerable.

Yesterday, panic set in. Those who have lent money to Italy are no longer confident that they will get it back. Naturally enough, they demand a higher interest rate to compensate for the risk of losing their loans. Their fear thus risks becoming self-fulfilling, as Italy is unable to afford the interest rate. The prospect of Italy defaulting on its debts looms.

Those commentators who imagine that we Eurosceptics are enjoying our told-you-so moment couldn’t be more wrong. The eurozone takes 40 per cent of Britain’s exports, and comprises our friends and allies. A recession there will mean another downturn here.

Failure

There are no good outcomes now, only gradations of failure. We can at least, though, pick the least bad of the three available options.

Option One is a disorderly default. Italy is beginning to experience a run on its banks as its citizens, anticipating a devaluation, move their savings abroad. The government might find itself unable to meet basic costs, and so have to welch on its outstanding debts.

Since no one would then lend it money, it would have to print lots of lira very quickly to pay the salaries of its soldiers, policemen and other vital public servants. The knock-on consequences for the eurozone and, indeed, for everyone else, would be disastrous, setting off a chain of bankruptcies across Europe

Option Two is a controlled departure. Italy would leave the euro and devalue its currency. Goods and services would become cheaper, boosting Italian exports and helping the economy to grow again.

Toppled: George Papandreou was forced to back down on his promise of a referendum on the Greek bailout package

This option might involve Italy writing off some of the debt it owes, but the default would be partial. If, by contrast, Italy remains in the euro, a full default — that is, writing off all debts — is hard to avoid.

Option Three is to struggle on as now. The rest of the eurozone will keep flinging money at Rome, the European Central Bank will purchase even more Italian bonds, and the IMF will step in with a loan. Option Three is the worst, because it prolongs and magnifies the problem. For more than two years, now, EU leaders have pursued this course, forcing new loans on to countries that couldn’t meet their existing liabilities, treating the debt crisis with more debt.

When their strategy fails, they accelerate it. What was initially sold as a bridging loan to tide Greece over for a few months has become a runaway train: bailout-and-borrow, bailout and-borrow, bailout-and-borrow.

So determined are EU leaders to pursue this course that they are prepared to remove elected prime ministers who stand in the way. When George Papandreou dared to suggest allowing the Greek people to vote on the loans-for-austerity package, he was toppled. The same thing happened to Silvio Berlusconi when he declared, six days ago, that ‘since the euro was adopted, most Italians have become poorer’.

Corruption

His statement was, of course, true. But Brussels functionaries understood Berlusconi’s game. What he was effectively saying was: ‘I don’t especially care whether we leave the euro; if you Eurocrats want to save it, you come up with the cash.’

Five days later, he had announced his resignation. The leader who had survived allegations of tax fraud, procuring underage sex, corruption with Mafia links, who had shrugged off investigations by 789 prosecutors and magistrates (by his own count), was brought down by the EU machine.

That’s how much the survival of the euro matters in Brussels.So why is the EU bent on pursuing a policy which is impoverishing its peoples? Why is it inflicting deflation, destitution and emigration on its southern members? Why is it lumbering its northern states with massive tax rises?

Resignation: Italian premier Silvio Berlusconi will leave his post after austerity reforms have been passed

Because, for supporters of the single currency, this was never about economics. As the German Chancellor, Angela Merkel, told her MPs last week: ‘If the euro fails, Europe fails. We have an historical obligation to protect by all means Europe’s unification process begun by our forefathers after centuries of hatred and bloodshed.’

Put in those terms, of course, the issue is literally beyond argument. If you oppose the euro, according to Mrs Merkel, you’re in favour of war.

By any objective measure, though, the euro is stoking rather than soothing national antagonisms. The relationship between Greece and Germany is now worse than at any time since — well, since World War II.

What should the EU do instead? It should oversee the phased unbundling of the single currency.

Supporters of the project insist a euro break-up would be technically unfeasible, but this is nonsense. All the countries in the single currency have recently managed to change their currency: that’s how they joined the euro in the first place.

It works just as well when leaving a currency union. I asked a Slovakian economist how his country had managed the transition when it divorced the Czech Republic in 1993.

‘Very easily,’ he replied. ‘One Friday, after the markets had closed, the head of our central bank phoned round all the banks and told them that, over the weekend, someone from his office would come round with a stamp to put on all their banknotes, and that, until the new notes and coins came into production, those stamped notes would be Slovakia’s legal tender. On the Monday morning, we had a new currency.’

The protestations that it cannot be done will strike British ears as familiar: it’s precisely what we were told about the Exchange Rate Mechanism, a forerunner of the euro in which a basket of European currencies shadowed the Deutschmark and which Britain joined in 1990.

Betrayal

Remember how the Establishment lined up to tell us that leaving the ERM would wreck our economy? Remember John Major’s claim that it would be ‘the inflationary option, the devaluer’s option, a betrayal of the future of our country’?

In the event, our recovery began on the day we left it in September 1992 after two years’ membership, and continued for a decade-and-a-half before Gordon Brown blew it away.

Members of the eurozone are, of course, free to make their own mistakes. If they are prepared to pay in order to keep the project going — or, more precisely, to make their peoples pay, since Eurocrats are exempt from national taxes — that is their right. What is unaccept-able is to send Britain the bill.

We are already on the hook for £12.5billion in the Greek, Irish and Portuguese bailouts — a sum equivalent to £500 for every household in the land. If we pursue the same failed policy in Italy, the sums will be far higher. We could end up contributing the £40 billion the Treasury plans to commit to the IMF.

All to prop up a currency which we didn’t join. We surely should not pay for the privilege of impoverishing our neighbours.